The fundamentals tell Stefan Ioannou, mining analyst with Haywood Securities, that the outlook is good for copper and zinc in the midterm, while for nickel, stronger-for-longer is the watchword. In this interview with The Gold Report, he warns that nickel’s price is unlikely to cycle up before 2017. For all three metals, producers are the safest bet, but some splashy exploration plays could have the biggest payoff.
The Gold Report: In October, Haywood Securities revised its prices for several commodities and predicted that copper prices should remain strong in the short term, zinc prices should strengthen over the medium term, and nickel would remain a long-term price play. Can you recap the fundamentals for each metal, starting with copper?
Stefan Ioannou: Because it is so widely used, copper is the master of the base metals. All base metal prices have been stressed this year, due to global economic uncertainty. Despite some week-to-week and month-to-month volatility, copper prices have generally stayed in the $3.25 to $3.35/pound ($3.35/lb) range.
“Concern over a near-term surplus in copper supply has kept the price from going higher.”
Concern over a near-term surplus in copper supply has kept the price from going higher. Over H1/13, London Metals Exchange (LME) inventories increased over 100,000 tonnes (100 Kt), venturing north of 600 Kt. Year-to-date, net LME inventories are up 40%. Many market forecasters still predict 2013 net surpluses of over 250 Kt.
TGR: Yet the Chinese are paying a premium of $0.08 to $0.10/lb in Shanghai.
SI: LME inventories are just one piece of the pie. There also are the Shanghai inventories, in-house inventories held by producers and inventories in what are called Chinese bonded warehouses.
Data through September suggest that, while LME inventories have been up 100 Kt, the Chinese bonded warehouse inventories are down 700 to 800 Kt, implying a net deficit on the order of 600 Kt. That paints a very different picture.
Of course, we don’t know how the copper moving out of the Chinese bonded warehouses is being used. Is it going into manufactured goods, used as finance collateral, or just being stored elsewhere? Furthermore, recent data pertaining to the month of October suggests Chinese bonded warehouse inventories have since rebounded by 150 to 200 Kt.
TGR: What are the fundamentals for zinc?
SI: Zinc inventories on the LME reached an all-time high of 1.2 million tons (1.2 Mt) in 2013 and remain very high. In the short term there’s a lot of zinc out there for consumption.
“A number of very large zinc mines are poised to end production over the next two or three years simply because they’ve run their course.”
The key thing underpinning the zinc story is an anticipated shortfall on the supply side. The zinc space differs from the copper space in that a lot of production comes from smaller mines. Over the years, that has created a fragmented industry.
A number of very large zinc mines are poised to end production over the next two or three years simply because they’ve run their course. That will take 10–11% of global zinc production offstream. The current list of timely advanced-stage development projects doesn’t come close to filling that gap.
Today, zinc is $0.85/lb, but there is a strong argument that as we move into 2015 and especially by 2016, zinc prices could be well north of $1.50/lb.
TGR: That would be something. What about nickel?
SI: Nickel is a longer-term story. In 2007, nickel ran up to $25/lb. That price spike sparked the rise of nickel pig iron production, which is nickel made from lateritic ores. It’s a sub-grade product, but can be used in certain types of steel manufacturing in place of higher-cost nickel. When nickel pig iron came on strong, it drove the nickel price down.